How to Buy Cheap Stocks

The name of cheap stocks might cause some confusion. The common understanding of cheap stocks is of little help to boost the assets of an investor’s portfolio. Successful cheap stock trading has nothing to do with blindly buying any stock just because of its low share price. The key of cheap stock trade is to find the undervalued stocks with promising potentials.

Peter Lynch – Master of Cheap Stock Trading

Peter Lynch is considered to be the best fund manager in the world. Under his management, the assets of Magellan Fund had increased from $18 million to $14 billion in thirteen years (1977 – 1990). Lynch’s investment philosophy is quite simple and straight forward. He believes in “Invest in what you know”, which echoes with what Warren Buffett preaches and practices “Never invest in a business you cannot understand”.

In One Up on Wall Street and Beating the Street, Lynch revealed the secret of his super performance is largely due to a series of successful cheap stock trading. Lynch coined an investment term called “10-bagger”, which refers to a ten fold return of the initial investment. Lynch had found more than a hundred “10-bagger” stocks during his career, just to name a few, Fannie Mae, General Electric, Ford Motor, Dunkin’ Donuts, Taco Bell, and Philip Morris International.

Normal investors would brag a lot if they could lay their hands on one or two of “10-bagger”, while many would never have this kind of experience in their lives. The fact that Lynch can find more than a hundred of them makes him a live legend of cheap stock trading.

Cheap Stock Trading Example with Forty-fold Return

While Lynch reigned as a fund manger, the market never ends to produce “10-bagger” stocks. Sina Corp. (SINA) is an excellent example after 2000. During the debacle of dot-com frenzy, the share price of SINA crashed from its all-time high $47.87 down to $1.07 in less than one and half year (May, 2000 – Sep, 2001), which qualified it as a cheap penny stock. Since SINA is a leading information service provider in China, during the next two and half years, SINA made a round trip back to $47.69 by Jan, 2004. For shrew investors, SINA would be a handsomely “forty bagger”, and multiply their investment portfolios many times in less than three years.

A thorough understanding of principles of value investing and Peter Lynch’s investment philosophy is indispensable to buy cheap stock successfully. For investors who rush to search for the next “10-bagger” best cheap stock, they might find their cheap stock picks aren’t cheap at all. It takes time and great efforts to buy cheap stock effectively. Be well prepared and do your homework, you might be able to add the next good cheap stock to your investment portfolio.

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